It does not appear from what your study is showing, that we are going to be in a very good position to go to the floor with reauthorization and tell our colleagues much more than what we have been telling them in the past as to why they should continue to support these programs.

I would solicit the assistance of your staff working with our staff in determining where we can go within a reasonable period of time and get a large enough model built so we can answer the kind of questions that are raised both by you and everyone else who discusses the student loan program in a thoughtful way.

Everybody who gets into it deep enough to go past the initial impressions seems to come to the bottom line of not knowing exactly how this program has worked and how it has changed. We have to assume that the millions of dollars that have been put out in BEOG's have had some impact on the amount of money being borrowed by the population served by BEOG's. We do not know to what extent BEOG's has been replacing the loan with cash among the low-income population. We will continue increasing the scale for BEOG's again and we do not know what happens to that. We have had a lot of proposals before us to rationalize the payment system, which almost everyone agrees is not a good system, because we have too many kinds of loans becoming due at the same time and we hit people with the loan obligation as they leave school. That removes all this beautiful rhetoric we have before us as to freedom of choice by saying you get a job that pays quick or you will be in trouble. We take all the freedom of choice, away from people by making them get a job as quickly as possible because they come out of schools with numerous debts.

Then we have groups testifying that we ought to increase the amount students can incur in indebtedness, particularly graduate students, and particularly those in the medical profession. The law schools now have a proposal to increase the amount of money that law students can borrow. There is a gentleman up in Massachusetts who wants to put them in permanent bondage forever and lend them all the money they can spend. I state on the record once again I do not support this program, despite the newspaper publicity to the contrary.

These are questions our colleagues will be asking us to answer. You leave us with a better definition of the dilemma but without any answers. Are you at a stage in your study where any of those questions can be examined in a more objective way with some objective findings to rely on within the next couple of months? Mr. FITT. Certainly. I like to think the work CBO has done has been on an objective basis. We do not care who operates the program but what we are interested in is explaining to the Congress as best we know how the consequences of different ways of operating and financing these programs.

But the main point that concerns me is the confusion over the nature of capital or money. There is a good deal of passion devoted to defending the present arrangements on the basis they encourage private capital to enter the student loan system and be made available to students. But in our view, capital is capital, whether it is borrowed by the Federal Government directly or whether the Federal Government pays 13 percent to a bank for a student's use

of the same capital. It is still capital and it does not have any philosophical or ideological identity. The basic characteristic of the present system is that the Government is paying considerably more for the use of the capital in the student loan system than if the Government borrowed it directly. That difference represents the price of the services of the middlemen that are participating present in the system.

Mr. FORD. Mr. Buchanan.

Mr. BUCHANAN. Thank you, Mr. Chairman.

Let me just ask you a list of questions, and if you are ready to, respond now; if not, perhaps you will for the record.

There are various proposals before us aimed at improving the student loan programs, the Maguire Fair Access Act, Kennedy tuition advance funds, Bellmon National Student Loan Bank. Are you prepared to comment on any of those proposals?

Mr. FITT. Our study, when it is concluded, will include a discussion of the various proposals that are on the table. I am not prepared today to describe our analysis of any of them in detail. Mr. BUCHANAN. How, in your judgment, can Congress distinguish between students who may be in need and those temporarily suffering a negative cash flow?

Mr. FITT. You can only do so if you have an income test for the first kind of loan, and that kind of test was abandoned in the legislation last fall. But I do not know anyway to distinguish between a need-based subsidy and one which is not need-based unless you measure need.

Mr. BUCHANAN. If the NDSL program should be abolished, what should be done with the institutional revolving funds? Should it remain at the institution, go to the State lending agency, used as funds of the last resort, or stay in the Treasury; or do you have a suggestion?

Mr. FITT. CBO does not make suggestions. That capital is in the system now. Certainly the part of it which has been put up by the institutions, the decision with respect to what happens to that, it seems to me, should be left to the institutions. The $4 billion or so in Federal capital-which is eroded, of course, because of the amount of default-but it is still a very large sum, well over $3 billion-I do not think it makes much difference what Congress does with that. The fact is, the cost of appropriating money or guaranteeing a student loan, paying 13 percent for it, is actually the same. The money that is appropriated for the NDSL program could equally as well have been borrowed by the Government in either case it is converted into another kind of asset, namely a student loan.

The question really becomes the extent to which the Congress chooses to have these programs on budget or off. The cost is the

same.

Mr. BUCHANAN. You mentioned the elimination of the need analysis in your judgment? Would this significantly reduce paperwork? Mr. FITT. Clearly on the first cut, it does. Since none of the applicants have to provide family income information now there has to be some reduction in the paperwork.

Presumably, most of those applicants provide family income information anyhow in connection with their applications for basic

grants or SEOG's, SSIG's, or whatever. What has been saved in terms of paperwork is a second furnishing of the same information, for most of them.

Mr. BUCHANAN. Do you have any judgment as to what extent the current high default rates are as a result of a high monthly repayment amount?

Mr. FITT. No, sir; I do not. I think the default problem is a result of default on the part of the various institutions, public and private, governmental and otherwise, in diligently attempting to have a responsible collection system.

I do not think anybody can say how much of a default rate is attributable to actual hardship on the part of the debtor and how much is attributable to the fact that nobody is pursuing him.

But the Federal Government's efforts to use their superior information in locating defaulters-and obviously it is more impressive to get a letter from the U.S. attorney than from the financial aid officer at your college-those efforts, presumably, should expose the cases where there is real hardship as distinguished from simply ignoring the obligation.

Mr. BUCHANAN. You mention the philosophical objections as to the idea of making debtors out of students in an attempt to help them.

I wonder, in the early years after school when the repayment time comes, logically, in most cases, those would be lower income years than later years, as one hopefully moves up in life. I wonder, therefore, if a loan repayment schedule starting with lower payments and building would make sense. Or does CBO not have any recommendations.

Mr. FITT. I do not know if it is possible to generalize usefully on that. Let me put it this way, we are not aware of any clamor or sense of unhappiness on the part of the population that is in repayment status, with respect to the kinds of arrangements that they are confronted with now.

It is too early for us to give a definitive response to that. Maybe we can never give a definitive response.

Mr. BUCHANAN. Mr. Chairman, I want to ask some more questions. I will take another turn or as you wish.

Mr. FORD. Mr. Gaydos.

Mr. GAYDOS. Mr. Fitt, I direct your attention to the bottom of page 5 of your statement where in the last paragraph you state: "in that it has no apparent effect on the decision to attend." We are talking about the 3-percent loans. Would you elaborate on that? Is that the consensus of opinion that students who should have the 3percent loan available are not influenced? Those of us who think there should be no interest payable by the student while he attends school find it difficult to understand your observation.

Mr. FITT. First of all, there is no interest while the borrower is in school, so the first period is an interest-free situation no matter which program he is under.

Mr. GAYDOS. Both programs are the same, no interest while attending school?

Mr. FITT. Right. So the differential arises after they leave school. I am not familiar with all the literature on the subject. I have had to depend on my colleagues for a great many of the statements I

have included in the testimony today, but I am told as far as the researchers can establish, the interest rate is basically a matter of indifference to the borrower. It does not seem to matter whether it is 3 percent or 7 percent in terms of his decision to enroll in college.

Mr. GAYDOS. Enroll in that college or college generally? If I was a prospective student, I would think all logic dictates that it would be a factor whether I have a loan available to me as a student, which I will be paying back at a 3-percent rate or a 7-percent rate. I would think that would be a very important consideration. Yet I am very interested in why you make the statement that the amount of interest paid and the time when it is paid has, as you state: "no apparent effect." It is not your quote. You are quoting somebody else. I cannot understand that, can you?

Mr. FITT. Clearly given a choice of a 3-percent loan after college or a 7 percent loan after college, you would choose the 3-percent loan. But where the 3-percent loan is not available, the decision to enroll does not seem to be affected. If I may, sir, I would like to furnish a more comprehensive answer for the record. I am feeling that I am beyond my depth at the moment, except passing on the results of the research that my colleagues have described.

Mr. GAYDOS. I can understand that. It is most important to me personally and the committee generally, because we are down to the crux of the problem. Is there a reason for a distinction between the two programs? Which program should be furthered, and which program should be abandoned? In other words, which program should be funded? I think that this entire problem is very important and it should be studied in depth.

On that same subject, I wonder if you could elaborate, based on information submitted to you, about the fact that whether you pay 3 percent or 7 percent later on when you leave school, it depends on chance. How does that work, that chance business?

Mr. FITT. The first point at which chance comes into play is the decision with respect to where the student enrolls. If the institution is a participant in the NDSL program, then he has some chance for an NDSL loan. If it does not, he does not.

Secondly, the amount of NDSL

Mr. FORD. Could I interrupt there? One thing to keep in mind, is that less than a third of the institutions are participating in the 3percent loan.

Mr. FITT. About half, I believe.

Mr. GAYDOS. But there would be more participating if we changed our entire approach to this problem, would there not?

For instance, if we had emphasized work-study awards, of BEOGS, and a student loan program that guarantees students accessibility, thus participation problems might not exist. It is just a matter of different distinctions as to why some are participating and some are not.

I am trying to get down to hopefully where our directions should be pointed. Should we be eliminating one of these programs and retaining the other, or maybe doing away with both the 7- and 3percent loan programs and going into the work-study award program and going into the BEOG's on a more comprehensive scale?

I am trying to pick your brain as to how you feel assuming that you are in a position to give us the information in your professional capacity as counselor.

You are giving us facts. You have stated uncategorically that you would not want to venture an opinion, did you not? And I can understand your position. I am not trying to put you on the spot. Now what about this chance factor? You say some are participating. As Mr. Ford, the chairman, says, some are not participating. What other elements of chance are there, outside of the qualifications?

Mr. FITT. The second point at which chance enters is the availability of the NDSL capital at the particular institution.

Mr. GAYDOS. We can cure that aspect of it, can we not, by making more or less available. That can be cured.

Mr. FITT. Yes. In theory, there is some point at which the loan demand could be met if you supplied enough capital. Then you would not have to put any more capital into it. But we are so far short of it now, I believe, that it is not a realistic possibility in terms of annual appropriations.

Then within an institution, take a university, which may be composed of 8 or 10 different schools, an undergraduate division, law school, forestry school, and so on, the NDSL funds are allocated to different schools. So, they may run out much sooner-the undergraduate allocation-than that in the law school, for example, or the forestry school, so that chance again is at work.

Mr. GAYDOS. Is there another chance factor? For example, if I went to one school that had the program I may qualify, and if I went to another school that had the program I may not qualify? If you have the same student, two different schools, two different institutions handling the application, then at school one I get it, and at the other I do not?

Mr. FITT. It could happen.

The purpose of the program is to entrust the funds to the institutions with the lending decisions. Obviously institutions vary in the process, in the way they allocate the money. In the law school my son attended, as I indicated, he got an NDSL. I am sure in other schools they would not dream of giving such a highly subsidized loan to a person with such high earning prospects.

Mr. GAYDOS. I have no further questions, Mr. Chairman.
Mr. FORD. Mr. Ratchford.

Mr. RATCHFORD. It seems to me we have a problem crying for a solution and the problem keeps being restated and the solution does not seem to appear. I know you are not in the opinion business, but did you look at the issue of consolidation at all?

Mr. FITT. Yes.

Mr. RATCHFORD. Any observations as opposed to opinions?

Mr. FITT. It is difficult to consolidate loans when there are different interest rates involved. There are technical solutions to that problem. One would be to establish a single loan program so that the paper basically was interchangeable. There are advantages and disadvantages of having a single loan program, but that is one solution to the consolidation problem.

Another would be to-and it would cost money-would be to have a program by which you bought the NDSL paper from the